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CUNA, CUs Participate In Freddie's Credit Risk Sharing Meeting

McLEAN, Va. (7/29/13)--Freddie Mac Friday announced that a new synthetic type of agency mortgage-backed security (MBS) that could decrease taxpayer exposure in the mortgage market was ready for trading. The Credit Union National Association was present and participated in the briefing to ensure that credit unions were represented.

The $500 million offering of Structured Agency Credit Risk (STACR) Debt Notes, Series 2013-DN1, was priced Tuesday and scheduled to settle Friday. STACR debt is the first in a series of such offerings. The securities would, in essence, offload a portion of the risk of certain government-guaranteed MBS into the investors in private capital markets. The STACR bonds, originally scheduled to be $400 million but increased to $500 million due to investor demand, were purchased by a number of investors, including credit unions, according to Freddie Mac.

"This is a novel structure for mortgage-backed securities that could reduce the taxpayer's exposure and risk," said Robin Cook, CUNA assistant general counsel for special projects. "It is an interesting way to bring more private capital into the mortgage marketplace without legislation."

STACR debt notes are different than other Freddie Mac securities and debt issuances. Under the STACR structure, the amount of periodic principal and ultimate principal paid by Freddie is determined by the performance of a large and diversified reference pool of more than 96,000 loans, representing a $22.5 billion residential mortgage loan balance. This pool consists of a subset of 30-year, fixed-rate, single-family mortgages acquired by Freddie Mac in the third quarter of 2012.

Freddie retains control of the servicing of the loans in the reference pool, which allows the loans to follow Freddie's loss mitigation practices and programs. Freddie also retains a share of losses on every loan in the reference pool, ensuring that its incentives are aligned with investors.

"Treasury believes these efforts are an important step to increasing private sector participation in the housing finance sector," said Michael Stegman, counselor to the Secretary for Housing Finance Policy Friday. "This tool helps protect the interests of the American taxpayer, with private capital taking the predominant credit loss--aligning with the administration's goal of reducing the government's footprint in the mortgage market."